Academy Sports and Outdoors, Inc.

A very quick look.

The Business

They sell outdoorsy stuff including camping gear, guns, hunting gear, etc. Their main competitors are Dick's sporting goods, Walmart, and other large retailers. DKS, however, focuses on a customer base that is more affluent. So ASO is targeting middle class America and their obsession with the outdoors.

The Good

The company aims to expand across the country. They currently have 285 stores and hope to have around 450 stores by 2030. Their expansion would be mostly self-funded with the free cash flow from current stores. There is not much debt, most of it is paid off in the last 2 years. Balance sheet looks strong.

Shares are being repurchased and dividends are being issued out. Since 2021, they have repurchased around 1.4 billion worth of shares with 476 million still left for buybacks. They are purchasing 200 million or so every quarter which is a lot for a company with a market cap of 3.57 billion.

The Bad

Same store sales are declining and the revenue remains flat despite an increase in the number of stores. This is because camping and outdoorsy purchases are cyclical. People purchased a lot of this stuff during covid and because of inflationary and macroeconomic pressures on the middle class, this sector is heavily hit by reduced purchases.

Valuation

Currently each store makes around 20 million in revenue. With a profit margin of 7 to 9%. Let's say in 2029 they have 450 stores - giving us a revenue of 9 billion. Slap the margin on and you get a 720 million net income. With a PE of 10, we get a 100% upside from the price it is selling for today. A good margin of safety.

For a better estimate, let’s put the numbers in a Monte Carlo simulator. With stores ranging from 400 to 500. Revenue from 20 million to 25 million. A profit margin of 7 to 10%. A PE of 8 to 12.

Risks

Same store sales might keep reducing and thus increasing the pressure on expansion plans. Trade war with China might increase the cost of goods - reducing same store sales further.

But really, if you crunch the numbers, the downside for your investment won't be that bad since the stock is so low. Even in the worst case, I see a revenue of 6 billion per year (same as current) and a profit margin of 7-8%. Currently the PE is 7.8, how much lower can the market price this business? Given that there is no risk of bankruptcy or negative net income.

Thoughts

I believe consumer spending on this stuff will continue to decrease - the middle class seems to be suffering from an increased cost of goods but salaries are not keeping up. But eventually things should start looking better as the cycle recovers. So if your holding period is long enough, you will see same stores sales on the rise. That's when today's store expansion plans and share buybacks will pay off.